Client Update

If you’re a dedicated market geek with plenty of time on your hands, you can uncover some really interesting things about stock market history and—perhaps—learn some interesting lessons from them. Thus Michael Batnick, of Ritholtz Wealth Management in New York, took a deep dive into the numbers, and these are some of the things that he found. 

Since 1916, the Dow Jones Industrial Average reached new all-time highs on fewer than 5% of all market days.  Think about that: during a time period when the index has delivered 25,568% positive returns, investors have been under-water 95% of the time.  Since 1970, the Dow has grown at less than .03% a day—but through the powerful magic of compounding, that has resulted in a 3,000% total gain.

If you’re the sort of person who might be inclined to bail out during a market decline, then Batnick points out that 20.6% of the time—while these incredible long-term returns were being generated—the Dow was down 40% or more from its highs.  His comment: “no pain, no gain.”

One time period when you might have been inclined to bail out was during the 1970s.  Over that entire decade, from January 1, 1970 to December 31, 1979, the Dow gained just 38 points.  (It’s over 25,800 today.) 

There’s an ancient question in the investment markets, which is affecting the marketplace in a variety of ways: is an active manager’s investment performance the result of luck or skill? 

The layperson’s answer would be obvious: anybody who has expertise and works hard at something should, eventually, produce results superior to what is achieved randomly.  An example is the many tennis players who enter a tournament.  Chances are, you know that one of a particular five players will win the tournament, because they’ve been proven winners in the past.  They have superior skill levels, and if an average person were to devote his/her life to mastering the skills of tennis, that person would tend to beat people who aren’t working as hard at it.

Right?

Many investment professionals reject this logic when it comes to the investment markets.  Yes, it would seem that people who put a lot of time and energy into investigating the fundamentals of stocks and bonds should outperform those who indiscriminately buy stocks or bonds that happen to be part of an index. However, research has shown that, when you account for their fees and other costs, and calibrate their investments to comparable indices, actively-managed mutual funds have stubbornly tended to underperform those indices over 10-year time horizons.  Indiscriminate buying coupled with lower costs has, on average, beaten the skills of thousands of diligent, sometimes brilliant professional fund managers.

Virgin Group founder and self-made billionaire Richard Branson dropped out of school at the age of 16 to start Student Magazine, and later founded Virgin Records—and a few other businesses along the way.  Over time and various blog posts, he has recorded some thoughts on how to be successful in business and in life, apparently without taking himself too seriously.

Branson starts every day by getting his blood pumping, either with an hour of tennis or kitesurfing.  He says that this gets his endorphins going, triggering a positive attitude and reducing stress.  He also takes frequent breaks throughout the day, drinking about 20 cups of tea a day, not just to stay energized, but also to reflect.  These breaks, he wrote, help him see new ideas and reflect on the solutions to problems that are bedeviling one of his companies.

Branson is also a big believer in talking notes throughout the day, believing that the act of writing down ideas and what he wants to accomplish each day is an often-undervalued key to success.  He sets short-term and long-term goals; achieving the short-term ones helps him keep morale up and encourages him to keep working on the long-term goals. 

Branson also suggests that we cultivate the bravery to identify what we really want and then go for it, rather than sitting around waiting for things to happen.  Working hard, and taking chances, and seizing opportunities helped him create his businesses despite the perpetual fear and self-doubt that plague us all.

Along the way, Branson recommends that you be generous at work, and try to have a positive impact on the people around you.  Sharing credit where it is due and giving compliments and “Thank-yous” can help build trust and create mood-boosting friendships with your co-workers and staff.

Many people wait too long to create advance health directives and designate a health care surrogate, and the results can be tragic.  A recent article, by a physician who is also a financial planner, illustrates a not-uncommon situation that nobody wants to find themselves in.

The story begins with a woman suddenly becoming acutely ill and uncommunicative.  She’s rushed to the emergency room by ambulance, while her partner scrambles to get to the hospital.  The patient’s condition quickly worsens.  By the time her partner arrives, it has been determined that the patient will need to be placed on a ventilator, or she’ll die.  But her death appears to be inevitable, so this will only prolong her time in a hospital bed.

 Who is going to make that decision?

The partner had been designated as the patient’s health care surrogate, but in this case, couldn’t remember how to find the documentation.  The woman, unconscious in the hospital, had been adamant in her conversations about advance directives—which serve as a record of someone’s health preferences—that if she had a serious health event that was going to kill her, she wanted to be kept comfortable and have as peaceful a death as possible.  Her partner had participated in these meetings, had been named the health care surrogate, and had been involved in drawing up the advance directive.

Investors who reacted emotionally to market movements have been humbled yet again.  When U.S. stocks (measured by the S&P 500 index) fell 13.97% in last year’s fourth quarter, some of us felt in our gut like the market was in the midst of a major bear market collapse.  The downturn could continue into the new year and take some or (worst case scenario) all of the 9+ year bull market profits with it.

Fortunately, we make decisions with our brains instead of our guts, and our brains might have noticed that the economy was not declining, companies were not going out of business, and there was no sign of blood in the streets.  And sure enough, the markets turned around.  So far, the S&P 500 index is up for the year, and anybody who sold out last year missed the rally and the profits thereof.

Of course, that doesn’t mean that the current rally will continue through this month, this quarter or this year, but that’s the point.  From day to day, month to month, year to year, past returns don’t tell us anything about the future, and anybody who thinks they can guess whether a downturn will continue or whether a good month means more ahead is likely to guess wrong and lose out on the long-term benefits of being an investor. 

Let’s chalk the 2018 fourth quarter and first days of 2019 to yet another lesson learned.  We can’t stop listening to our gut, but we can make a vow not to always act on what it says.  With investing, it’s been wrong too many times before.